The new Executive Order requires reporting of labor law violations, which may jeopardize federal contracts, and requires contractors to agree that certain claims would not be arbitrated without the voluntary postdispute consent of employees or independent contractors.

On July 31, the White House issued a new Executive Order that leverages federal contract power to enforce labor and employment laws.[1] The order will add considerable uncertainty to the contract award process, authorize a host of federal officials to negotiate remedial programs with contractors under threat of contract termination, and impose administrative burdens on contractors that report their own and their subcontractors’ labor law violations. The Executive Order also takes aim at predispute arbitration agreements covering claims arising under Title VII or any tort related to or arising out of sexual assault or harassment and requires that federal contractors agree that the decision to arbitrate such claims may only be made with the voluntary consent of the employee or independent contractor after the dispute arises. However, this requirement would not apply to preexisting arbitration agreements unless the employer has discretion to modify the agreement.

The controversial order will likely invite litigation by trade associations as to whether there is statutory authorization for the new requirements and whether the order conflicts with federal law. For example, the requirement that federal contractors agree that Title VII claims will not be arbitrated without the voluntary postdispute consent of employees or independent contractors conflicts with the Federal Arbitration Act (FAA), which reflects a “national policy favoring arbitration,” and section 118 of the Civil Rights Act of 1991, which expressly provides that “the use of alternative means of dispute resolution, including . . . arbitration, is encouraged to resolve disputes” under Title VII. The U.S. Supreme Court has long recognized that Title VII claims are arbitrable and recently held in CompuCredit Corp. v. Greenwood that the FAA requires that arbitration agreements be enforced according to their terms, “even when the claims . . . are federal statutory claims, unless the FAA’s mandate has been overridden by a contrary congressional command.”[2]

The new Executive Order will be implemented through amendments to the Federal Acquisition Regulations issued by the Federal Acquisition Regulatory (FAR) Council (consisting of the Administrator for Federal Procurement Policy, the Secretary of Defense, the Administrator of National Aeronautics and Space, and the Administrator of General Services). Employers will have an opportunity to submit public comments in response to any proposed regulations implementing the Executive Order. Given the many troublesome provisions discussed below, employers that have or may seek federal contracts will likely take advantage of this opportunity.

Which contracts does the Executive Order apply to?

The new reporting obligations will apply to federal procurement contracts of $500,000 or more and to subcontracts at the same threshold, unless the subcontract is for “commercially available off-the-shelf items”—a term defined in the Federal Acquisition Regulations.[3] The requirement that contractors agree that Title VII claims and tort claims related to or arising out of sexual assault or harassment would not be arbitrated without the voluntary postdispute consent of employees or independent contractors applies to federal contracts and subcontracts of $1 million or more, unless the acquisition is for “commercial items”[4] or “commercially available off-the-shelf items.”

When will the new requirements take effect?

The new requirements will apply to solicitations for contracts issued after the final rule implementing the Executive Order is published. According to a fact sheet provided by the White House, the final rule may be expected in 2016.[5]

What does the Executive Order require of employers?

Reporting

Employers seeking federal contracts will be required to report certain labor law violations that occurred within the prior three years when bidding on contracts. Importantly, awardees of federal contracts will also have additional ongoing reporting and compliance obligations that require the employer to submit reports of labor law violations every six months during the performance of the contract. If the contract is awarded, the employer must submit additional reports of labor law violations every six months during the performance of the contract. The reportable violations include “administrative merits determinations,” “arbitral awards or decisions,” and “civil judgments” (as these terms will be defined in guidance to be issued by the Department of Labor [DOL]) involving claims or enforcement actions under the following employment laws:

Fair Labor Standards Act

Occupational Safety and Health Act of 1970

Migrant and Seasonal Agricultural Worker Protection Act

National Labor Relations Act

Davis-Bacon Act

Service Contract Act

Executive Order 11246 of September 24, 1965 (Equal Employment Opportunity)

The Executive Order indicates that the reports will be made through a new government website that will be established.

Contracting agencies will use the reports to determine whether an apparent successful offeror in a federal procurement is “responsible” and thus eligible to receive the award. This is particularly troubling because any implementing regulation will likely leave a significant, subjective component to a contracting officer’s determination of what constitutes “serious, willful, repeated or pervasive violations” that could affect the responsibility determination, and contractors may only challenge responsibility determinations in limited circumstances. Further, the Executive Order requires that, in the post-award context, contracting officers consider reported information regarding violations of labor laws and whether action against the contractor is necessary. Such action may include forced remedial agreements, nonexercise of contract options, contract termination, and referral of the contractor to the agency suspending and debarring official.

Settlements do not need to be reported, which may pressure employers to settle labor law violations to avoid risking a reportable event that could threaten their federal contracts or subcontracts.

Subcontractor Monitoring

Prime contractors will be required to obtain similar reports of labor violations from covered subcontractors at the time of the subcontract award and at six-month intervals during the performance of the subcontract. Before awarding a covered subcontract, the prime contractor, based on these reports, must determine whether the proposed subcontractor is a “responsible source that has a satisfactory record of integrity and business ethics” and is therefore eligible for award. The Executive Order also requires that, based on reports indicating serious, willful, repeated, or pervasive violations, agency contracting officers, when appropriate, must refer a subcontractor with violations to the agency suspending and debarring official. The prime contractor must evaluate the reports and determine whether to take remedial actions against the subcontractor based on the nature and severity of the violations.

Arbitration Agreements

To be eligible for an award of a covered contract or subcontract, entities submitting a proposal or bid on a covered federal contract or subcontract will be required to agree that claims arising under Title VII or any tort related to or arising out of sexual assault or harassment by their employees or independent contractors will not be arbitrated without the voluntary postdispute consent of employees or independent contractors. It remains to be seen whether the implementing regulations will provide for this requirement to apply to all Title VII claims or only those “related to or arising out of sexual assault or harassment,” but we note that the regulations implementing a similar provision with similar language in the Franken Amendment adopted the more expansive reading. This provision does not invalidate preexisting arbitration agreements unless the employer has discretion to modify the agreement, but it will apply to any renegotiated or replacement agreement. It also does not apply to employees covered by a collective bargaining agreement. The requirement apparently applies whether or not the employee or independent contractor is personally involved in the performance of a government contract. Employers may want to consider the pros and cons of amending arbitration agreements to eliminate any right to unilaterally modify them before implementing regulations are issued.

Pay Notices

Covered contractors and subcontractors will be required to provide pay notices to nonexempt employees. In each pay period, the written notice must list the hours worked, overtime hours, pay, and any credits to or deductions from pay. The employer must also inform individuals of their exempt or independent contractor status.

How will these requirements be enforced?

The Executive Order requires each government agency to name a Labor Compliance Advisor (LCA), who will be responsible for a wide range of oversight responsibilities. In particular, the LCAs will consult with the contracting officers as to whether an employer’s report should preclude the award of an initial contract. With regard to violations reported during the performance of a contract, the LCAs will coordinate discussions among contracting officers, enforcement agency staff, and contractors to negotiate remedial programs as a condition of maintaining the contract.

The order suggests that a complaint alleging labor law violations could be submitted to an LCA or contracting agency (or perhaps the DOL) and that the LCA and contracting agency would consider appropriate remedial action, presumably after conducting an investigation or perhaps referral to an enforcement agency for investigation. The DOL is directed to inform contracting agencies of pending investigations of contractors “so that the agency can help the contractor to determine the best means to address any issues, including . . . resolving issues to avoid or prevent violations.”

The Executive Order further charges the DOL with issuing standards for evaluating the significance of reported labor violations, such as the number and severity of the violations, whether there were repeated violations, and whether the violation was willful.

What should employers do now?

Employers should conduct a privileged risk assessment to evaluate the potential effect of the Executive Order on their employment practices and federal contracts. Employers should also evaluate existing and contemplated arbitration agreements to determine the potential impact of the new order. As noted, there may be actions that employers can take before a final rule is issued to avoid some negative aspects of the order. The risk assessment may also provide information that employers can use to inform comments to the FAR Council on the proposed implementing regulations.

[3]. A commercially available off-the-shelf item “[m]eans any item of supply (including construction material) that is (i) [a] commercial item [see note 4 below]; (ii) [s]old in substantial quantities in the commercial marketplace; and (ii) [o]ffered to the Government, under a contract or subcontract at any tier, without modification, in the same form in which it is sold in the commercial marketplace,” excluding bulk cargo. 48 C.F.R. § 2.101.

[4]. A commercial item is defined as “[a]ny item, other than real property, that is of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and (i) [h]as been sold, leased, or licensed to the general public; or (ii) [h]as been offered for sale, lease, or license to the general public,” including items with certain modifications and certain services. 48 C.F.R. § 2.101.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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